Services sector’s informal trap

What's holding back formal job growth — supply or demand?

- R KAVITA RAO

A recent NITI Aayog report on employment trends in India’s services sector has put the spotlight on the evolution of jobs in this key area that accounts for the largest share of the country’s gross domestic product (GDP).

The report highlights the role of the services sector in employment generation in the country, with its share in total employment rising from 26.9 per cent in 2011-12 to 29.7 per cent in 2023-24. It examines the profile of employment across seven dimensions: Spatial distribution, gender participation, employment type, age profile, education, informality, and earnings. These profiles are used to identify structural challenges. The report also provides a menu of policy options to address the challenge of enhancing productive and gainful employment in the economy. In this piece, we explore the implications of one of these profiles — formal versus informal employment.

To begin with, we look at the comparison of elasticities of employment presented in the report, for different sectors, before and after Covid. The results are significant: There has been an increase in elasticity across all three sectors — agriculture, manufacturing, and services — in the post-Covid period. For the services sector, elasticity has risen from 0.35 to 0.63. The increase is heartening, but since the elasticity remains below 1, it suggests that growth in output and value added does not translate into a commensurate rise in employment.